The recent decision by PM Modi government to take out Rs 500/1000 notes out of circulation has caught the media and the whole country into a frenzy. The policy seems to be the government antidote against the issue of black money in the economy.
The main reason behind this demonetization decision is to cut down the black economy in the country and dry up the illegal funds of those who have collected it over the years. So if you have large unaccounted cash, it is as good as piece of paper beginning November 8.
The government is acting on the premise that there is large amounts of black money in India and it is held in cash. This gives us two scenarios in the wake of this decision-
1) There is really large amount of black money in the economy. So if you take this money out of economy, it will hit the economy hard post this decision, thus making demonetization a bad decision
or
2) There is no large amount of black money in the economy and there would be no impact on the economy. If this is the case, then it hardly makes sense to demonetize.
Having seen how an average medium sized business operates in India, one should lean towards the first scenario that economy will be hit hard by this decision. There are large number of inefficient and unseen taxes on businesses, which makes them less productive and also makes it essential for them to engage into unlawful activities to keep the business running.
So who might have large amounts of cash sitting at their place? Just think of any neighbourhood shop which does not give a receipt for your purchase, the owner there might have generated some amount of black money. And if the amount of black money hoarded by them is really high, expect them to fire their employees and shut shops in the wake of this decision.
One of the sectors which is supposedly flushed with large amounts of black money is the real estate sector. The real estate sector has not done well for the past two years and it might get hit even more post this decision. There might be many people with white money, who have invested in unfinished projects, and they would lose all their investment because the real estate company cannot complete the project now.
Also, the whole exercise seems a bit futile once you take into account that the government has decided to reissue new Rs 2000 notes. The rules of the game i.e. the discretionary power with the babus, have not changed and those who earlier collected Rs 500/1000 notes will now switch to hoarding money in Rs 2000 notes. So, this will have no impact on the future generation of black money.
So, what should you make out of this policy? Brace yourself for a rude shock if you really believed that black money formed a significant part of Indian economy. And if you don’t get this rude shock, then it was just an empty noise without any substance and black money was not even an issue to begin with. Black money is a symptom of the inefficiencies and bad laws in the economy, which forces a large number of businesses to cut corners to remain viable.
P.S. 1- The article only dealt with the economic issues of black money and some people will point out its impact on terrorist infrastructure or future state elections.
P.S. 2- There is 3rd scenario not mentioned above, if you believe in super powers of black money hoarders- they have large amounts of money but they find a way to fool Modi government.